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The Fed is on Hold, but Consumers Could Still Save

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After three consecutive rate cuts in 2019, the Federal Reserve is expected to keep the benchmark federal funds target rate unchanged throughout 2020. The first meeting of the year on Jan. 28-29 should be unremarkable as the Fed has signaled that it is pleased with how the economy has responded to earlier cuts.

For consumers, it’s the transmission of Fed policy to personal financial products that matters most. Although the Fed will be on hold, interest rates in the consumer marketplace won’t be idle. Some rates, such as mortgage rates, operate independently of the federal funds rate and react in real-time to changes in economic sentiment. Since the last Fed meeting in December, mortgage rates have fallen by about 13 basis points to the lowest level in three months. This has boosted the housing market and creates an excellent opportunity for current homeowners to refinance. 

Interest rates for other products that are directly linked to Fed actions, though, could still see changes from previous rate cuts. During the last rate cut cycle, which began in September 2007, rates didn’t adjust right away. A look at changes in consumer rates around the first 75 basis points of cuts in that cycle suggests that lower rates may be in play for borrowers. The January meeting will be three months after the last cut in late October.

The impact of the fed funds rate on fixed mortgage rates can be ambiguous. The federal funds rate and mortgage rates are not directly linked. Rather, they are often influenced by the same factors, yet rarely impacted to the same extent.

Mortgage rates have been declining since their November 2018 peak, down more than 125 basis points compared with a 75-basis-point fall in the fed funds rate. The federal funds rate is a short-term overnight rate. Most consumers opt for a 30-year, fixed-rate mortgage, which is more closely linked to the long end of the curve — the 10-year Treasury.

Variable-rate products can be influenced by factors other than the federal funds rate. Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are based on short-term rates, which usually see a more direct impact from changes in the fed funds rate. However, other factors, such as lender profit margins and competition, can influence rates, too. So even though the Fed is taking a pause, there will be fluctuations in these product rates — and that means consumers should shop around to get the best deal. 

Credit card rates had a muted response to rate cuts in 2019. Credit card interest rates track the bank prime rate, defined as 3% above the federal funds target rate. The prime rate moved down immediately with the last rate cut, however, many credit card contracts don’t automatically adjust rates downward. Some credit card companies may elect to keep rates unchanged to account for default risk or to increase profits. Cardholders should call their issuer and ask for lower rates.

Interest rates on auto loans won’t see much of a direct impact. New cars are often financed by auto manufacturers, and the interest rate is a part of the entire car-buying transaction. Since the last rate cut, cheaper funding for manufacturers and dealers should have improved their financial metrics. This means consumers may have an opportunity to not only find a better rate, but also negotiate a better price — an indirect benefit of the rate cuts.

Rates on deposits have been falling, but not for all institutions. Many financial institutions don’t fully incorporate increases in the federal funds rate on their deposit offerings but are more likely to incorporate cuts immediately. This means consumers with high-yield savings accounts, in particular, could see lower returns because of recent rate cuts. If you’re looking to open a savings account, consider locking in good rates sooner rather than later.


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